What occurs during the distribution phase?

During the distribution phase, stocks are primarily sold from strong hands to weak hands. This phase typically occurs after a significant uptrend in stock prices, when the initial investors or institutions that contributed to the price increase begin to sell their positions to less experienced or less disciplined investors who may not fully understand the potential risks involved.

The distribution phase is characterized by a lack of new buying interest, as informed investors—having realized that prices may be peaking—start to exit their positions. As they sell, the strength of the stock often diminishes, leading to increased volatility and potential price declines. This selling activity can create a false sense of security among new investors, who might believe that rising or stable prices indicate ongoing strength. Therefore, the transition of stocks from stronger hands, perceived as knowledgeable or strategic investors, to weaker hands, often results in unfavorable conditions for the latter group.